Cloud Live Technology Group Co.,Ltd.'s (SZSE:002306) 26% Share Price Plunge Could Signal Some Risk

Cloud Live Technology Group Co.,Ltd. (SZSE:002306) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 46% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Cloud Live Technology GroupLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 15.9x, considering almost half the companies in China's Entertainment industry have P/S ratios below 7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Cloud Live Technology GroupLtd

What Does Cloud Live Technology GroupLtd's P/S Mean For Shareholders?

For example, consider that Cloud Live Technology GroupLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Cloud Live Technology GroupLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Cloud Live Technology GroupLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Cloud Live Technology GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's top line. As a result, revenue from three years ago have also fallen 66% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Cloud Live Technology GroupLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Cloud Live Technology GroupLtd's P/S?

Even after such a strong price drop, Cloud Live Technology GroupLtd's P/S still exceeds the industry median significantly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Cloud Live Technology GroupLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Cloud Live Technology GroupLtd has 2 warning signs we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.